If insurance is supposed to actually make it possible for people to afford treatment when they get sick, then many Americans who think they have insurance will someday discover that they don’t.
Reason #3: Pharmacy Benefit Managers Get Paid
The third reason is the existence of Pharmacy Benefit Managers (PBMs), a type of insurance company that extracts a profit whenever a patient gets a drug, even if the patient pays for that drug out of pocket. This profit comes from a rebate that the drug company pays to the PBM, essentially a kick-back, and it’s entirely absurd. Imagine getting into a minor car accident and discovering that your mechanic must pay $50 to your car insurance company even if your total bill is $400 and you pay it all out of your $500 deductible. That means that you’ve paid the mechanic $350 for the actual repairs and, despite all the insurance premiums you already pay, your insurance company manages to extract $50 more from you through your repair bill. Before you get too angry with your car insurance, I’ll reassure you that this isn’t how it works (and when it happens, it’s a crime).67 But health insurance does work this way. We’ll take a much closer look at PBMs in Chapter 7.
Combating Out-of-Pocket Costs
For now, suffice it to say that drug companies are aware that insurers erect barriers (in the form of high out of pocket costs) between patients and the drugs their doctors prescribe. This has created a bit of an arms race between drug companies and insurance companies.68 For example, drug companies commonly give patients with private insurance coupons to offset their copayments.69 In response, insurers sometimes institute a ‘copay accumulator,’ a rule that says that the coupon doesn’t count toward the patient’s deductible. The result? When the coupons run out, if the patient’s out-of-pocket spending—not counting the coupons—don’t meet or exceed the deductible, the patient will have to keep paying his share before insurance kicks in. It’s not enough that a physician prescribes a medicine—the insurer wants to see the patient strain to pay for it before contributing to covering the rest of the cost.
Not every out-of-pocket cost is egregious. Insurance companies imposing a small copayment for doctor visits can discourage people from going too often with minor complaints, while still making it affordable for everyone to get annual checkups. But prescription drugs are a different story. A patient can go to a doctor on his or her own initiative, but patients can’t legally get a prescription drug unless a doctor prescribes it!
Insurance companies set low copayments for inexpensive generic drugs and higher copayments for branded drugs. That differential makes a certain amount of sense: the high copayment encourages patients to choose the generic version of whatever branded drug their doctor prescribed, if one is available. But why should there be a copayment, however small, for a generic drug? And why are there large copayments for branded drugs for which there are no generic substitutes?
Copays and deductibles not only make filling a prescription difficult or impossible for many, they force many patients who initially filled the prescription to stop taking their medications as prescribed, leading to worse outcomes and higher long-term costs. Even small copays and fees—as low as $1 to $5—reduce a patient’s adherence to treatment and cause patients to avoid necessary care. The higher the copay, the greater the reduction, which sometimes has terrible consequences (e.g., diabetes without insulin treatment is lethal).70
Approximately 50% of patients who fail to adhere to their prescriptions do so in part because of copays. High deductibles push many patients to cut out valuable preventative services (e.g., consulting a doctor about a skin infection before it becomes a dangerous abscess). Greater cost-sharing is also associated with increased ER visits.71 Low-income patients are often the most vulnerable. Indeed, the very term “cost-sharing” disguises what could be more aptly described as an institutionalized failure to insure.
If Not Out of Pocket, Where Would the Money Come From?
In 2018, Americans paid roughly $2.6 trillion in 2018 in private insurance premiums and taxes that fund Medicare and Medicaid (I’ll refer to all these as “premiums”).72 That year, Americans paid $61 billion in out-of-pocket costs for drugs, which are harder to bear when one is sick and often older. Americans’ total personal income stood at approximately $17.5 trillion in 2018.73 Grab a calculator: Eliminating all out-of-pocket costs for medicines would only require either a 2.3% increase in all premiums or a 0.35% increase to the total tax rate Americans pay.
Maybe most people, if they need one prescription or only need generics, can afford to pay some out-of-pocket costs. So instead of getting rid of all of them, we could cap them to reduce the burden on those hardest hit, like patients with multiple chronic diseases. Such caps would require shifting less than $20 billion to premiums or general taxes.74 This means we’re talking about either increasing premiums by 0.76% or adding 0.11% to Americans’ overall tax rate. These increases are modest considering the security that all Americans would gain knowing that when they need a drug, they will be able to afford it (which is the whole point of insurance). Would making drugs more affordable increase utilization? We know that patients currently can’t access treatments they need, so I hope it would. Inappropriate utilization of drugs is already managed in other ways, including equipping physicians with software to remind them of medical guidelines.
Patients also paid over $300 billion out-of-pocket for healthcare services in 2018 (doctor’s visits, surgeries). Some of these costs make sense when the goal is to make a person consider whether they really need to see a doctor, so let’s estimate that helping the hardest hit patients would require shifting the most burdensome third of those costs (approximately $100 billion) to premiums and taxes. That would require either increasing premiums by 3.8% or adding 0.57% to the overall tax rate.
I’ve assumed here that eliminating or reducing out-of-pocket costs would result in a direct shift of that money to premiums. But that’s not necessarily true. For example, the Congressional Budget Office calculated that one proposal for reducing patient out-of-pocket costs would result in a $10 billion increase in Medicare spending on drugs over 10 years. But that drug spending would be offset by a $20 billion reduction in spending on healthcare services such as hospital and physician care.75 So reducing out-of-pocket costs could actually ultimately reduce our insurance premiums.
In a speech delivered to insurance company executives in early March 2018, former FDA Commissioner Scott Gottlieb hammered home the point. “Patients shouldn’t face exorbitant out-of-pocket costs and pay money where the primary purpose is to help subsidize rebates paid to a long list of supply chain intermediaries, or is used to buy down the premium costs for everyone else,” he said at the national health policy conference of AHIP, the insurance company lobby. “After all, what’s the point of a big copay on a costly cancer drug? Is a patient really in a position to make an economically based decision? Is the copay going to discourage over-utilization? Is someone in this situation voluntarily seeking chemo?”76
Indeed, this “skin-in-the-game” approach only works when informed customers can comparison shop, but most sick patients have neither the medical training nor often the composure to truly understand their options. At some point, a nudge to not overuse healthcare that the patient doesn’t need becomes a shove away from healthcare that the patient does need, and that is horrendous. For all the outrage over drug prices, imagine what the debate would look like if patients could count on their insurance plans to pay in full for whatever drug their physicians prescribed. Once patients are fully insured, then the discussion about whether drug costs make sense would be had between industry and society, as it should be.
Some have argued for a biotech social contract that places responsibility on drug companies to make sure that patients have access to their drugs.77 This stance ignores the role of insurers’ cost-sharing mechanisms. Drug companies can’t make branded drugs affordable to Americans who don’t have insurance or who have poor insurance.
If we cut the cost of most branded drugs in half tomorrow, decimating the drug industry, there would still be many Americans who wouldn’t be able to afford to pay Medicare’s required 20% copay for their medicines. So if the drug industry is to keep making new medicines, as I hope we all agree it should, it cannot support itself by charging prices that most patients can afford. Just as the fire department offers everyone security but its service would be unaffordable if only those who need its services paid for it, the drug industry is similarly sustained by high prices that the unlucky few who need novel drugs can’t afford. As long as we fail to recognize that the Biotech Social Contract relies on everyone having proper insurance, we’ll pursue the wrong solutions towards affordability.
We have entrusted our government and insurance companies to distribute the costs of healthcare across our population and across time so that people unfortunate enough to be sick don’t suddenly find themselves choosing between the branded drugs they need and their rent, food, or daycare. Insurance practices in America conform to laws passed by our elected representatives. So if the politicians we elect to Congress allow insurance companies to turn away people based on pre-existing conditions or to charge high copays, or if they pursue price controls that cut investment towards better treatments, then we have harmed ourselves and future generations.
Where Do We Go From Here?
If we truly hope to expand access and remove the financial burden of getting sick from the backs of Americans, then let’s upgrade our insurance system to one that actually provides proper insurance to everyone, rather than blaming the innovators for the prices of their newest drugs. Spending should be spread more evenly, instead of insurance companies hitting patients with toxic out-of-pocket costs when they are sick and most vulnerable. Imagine if, after being mugged, the victim had to make a copay to have the police show up.
The solution is to limit annual out-of-pocket costs for all patients and make sure that limit is low enough that patients are not discouraged from following through on what their doctors recommend for them.78 Neither generic drugs nor branded drugs without generic alternatives should have copayments—of any size—because there is no ethical alternative to nudge the patient towards. In those cases, the patient is just following a doctor’s advice, which is what a patient is supposed to do—and what society should want them to do.
Cutting out-of-pocket costs would lead to improved adherence to treatment, better health outcomes, and lower long-term healthcare spending. Physicians will be able to rely on clinical data and medical guidelines to prescribe treatments properly, increasingly with the help of algorithms embedded in electronic medical records that, to ensure that doctors are following medical guidelines, payers can influence systematically, instead of haphazardly, as they do now with copayments.79
Diabetics are more likely to stop taking their treatments earlier in the year when they are still paying out of their deductibles than later in the year, after they have hit their out-of-pocket maximums. They are more likely to continue to stay on treatment if they have steady jobs and can afford their copayments than if they have lost their jobs and are looking for new ones. Yet neither of these factors should interfere with a diabetic patient staying on treatment. Longer term, if a patient goes blind, starts experiencing painful neuropathies, or loses a limb, this becomes a personal tragedy and a loss to society—the patient suffers, risks losing independence, and will need emergency treatments and long-term care paid for by insurance.
But if cost-sharing discourages proper treatment and actually ends up costing insurers more money in the long run, then why do they do still burden patients with out-of-pocket costs? After all, aren’t these insurance plans rationally run businesses (and in the case of government plans like Medicare, isn’t it run by people motivated to do the right thing especially when it saves money)?
The problem is how most plans are set up in the first place. For example, the people responsible for managing drug spending only think about whether spending money on one drug will reduce spending on other drugs. They don’t think about whether spending on one drug will save the system money on surgeries, ER visits, and other healthcare services, which fall into someone else’s budget. And since Medicare takes over paying for everyone’s healthcare when they turn 65, a private insurance company won’t actually see savings from curing a hepatitis C patient when he is 57 years old with a drug that will prevent him from needing a costly liver transplant when he’s 68. Instead, that extra cost is borne by the patient and Medicare years later.
There is therefore an argument for integrating all health insurance into one budget so that drugs and surgeries are considered together and over the lifetime of a person, from birth into old age. This bleeds over into a discussion of a single-payer system. Whether this benefit of a single-payer system out-weighs the risks of entrusting a single bureaucracy with patient care is beyond the scope of this book.80 The key point I’m making is simply that, because of fragmented accounting (drugs vs surgery, young vs old), insurance plans don’t necessarily act rationally from a big picture standpoint.
Misalignment and Myopia
A larger truth is that payers have an incentive to let the overall cost of healthcare rise. For example, by law (per the ACA), most insurance companies must spend 80-85% of their revenues on patient care, the so-called Medical Loss Ratio (MLR),81 which includes hospital services and drugs, leaving 15-20% for the insurance companies to spend on their own operations, with anything left over as profit for their shareholders. If their profits are linked to the size of the pie, then they will want that pie to grow. For appearances, they will want to be seen trying to contain costs, but they don’t actually win in the long run by cutting costs. In theory, multiple payers bidding to manage a government plan or administer one for a private company will try to demonstrate that they can provide great care at a low cost to the client. However, with all the consolidation in the insurance business, most purchasers only have two or three plans in their region to choose from, and some have just one. When there are so few choices, insurers can tacitly collude to keep costs high: Without saying so (which would make it actual, illegal collusion), one can convey through inaction that, “I won’t offer your customers a discount to switch to my plan if you don’t offer my customers a discount to switch to your plan.”
Payers set their budgets annually, having to guess as to their costs over the next year so as to set their premiums at just the right level. They want to make sure that they are competitive with what other plans charge but are still left with the 15-20% margin to cover their own operating costs (and, in the case of for-profit plans, have some profit left over). Sometimes they are caught off guard by the launch of a drug for which they failed to anticipate the price and demand, as happened when Gilead launched its breakthrough hepatitis C drugs, Sovaldi and Harvoni, in 2014. It was in fact predicted well in advance (and some did) that a pill with near perfect cure rates wouldn’t be cheap and would inspire many more patients to seek treatment,82 but insurers failed to budget accordingly and tried to stop many patients from being cured until the following year’s budget cycle.83
What payers really want is predictability of expenses so they can adjust their future revenues to future expenses. Were they to do a better job of anticipating what’s coming through the R&D pipelines of biopharmaceutical companies, they might budget more effectively and spare patients the kinds of rationing tactics payers employed in the case of hepatitis C drugs. Many of those restrictions were later lifted, either by court order (because it’s illegal for Medicare and Medicaid to deny access to care on the basis of cost) or simply because drug prices fell due to competition.
Furthermore, private payers often cite the mobility of their customers (patients typically switch plans every few years) as a reason why it’s not worth paying for a treatment today that will result in savings down the road. This is clearly parochial thinking; if all payers agreed to pay for a preventative treatmen
t, they would all benefit as they got each other’s patients over the course of many rounds of musical chairs.
As our flawed healthcare insurance system struggles with its own contradictions, it will continue to present itself as society’s hero—trying ever so valiantly to contain costs—while vilifying everyone from physicians to drug companies and even patients. But an informed observer will note that these same plans prosper in the long run from the same rising healthcare costs they decry and are not making decisions based on what would actually benefit society in the long run.
Ultimately, the fact that drugs are inaccessible and unaffordable to some patients is due to insurers choosing to engage in aggressive cost-sharing. This practice is making sick patients pay more for drugs their physicians prescribe and set patients up to fail to follow their physicians’ recommended course of treatment. Patients deputized by cost-sharing into second guessing their doctor’s orders are understandably frustrated and looking for someone to blame. Having paid for what they thought was insurance, they expect—and deserve—better than to be so conned. These patients’ suffering and angst rightfully attracts media attention. What media should illuminate is the true nature and value of America’s Biotech Social Contract and the heartlessness of its flawed insurance system.
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48Samantha Artiga et al., “The Effects of Premiums and Cost Sharing on Low-Income Populations: Updated Review of Research Findings,” KFF, June 1, 2017, https://www.kff.org/medicaid/issue-brief/the-effects-of-premiums-and-cost-sharing-on-low-income-populations-updated-review-of-research-findings/;
Jeffery T. Kullgren et al., “A Survey of Americans with High-Deductible Health Plans Identifies Opportunities to Enhance Consumer Behaviors,” Health Affairs 38, no. 3 (2019). accessed Oct. 15, 2019. doi: 10.1377/hlthaff.2018.05018, https://www.healthaffairs.org/doi/abs/10.1377/hlthaff.2018.05018?journalCode=hlthaff
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